British Airways and Spanish airline Iberia have announced they are merging. The merger is expected to be completed in late 2010 will create the world’s sixth-largest airline and Europe’s third-largest (behind Lufthansa and Air France-KLM).

The two companies will operate separately, with customers benefiting from the tie-up with frequent flyer programs, common passenger terminals, code sharing and usage of both airlines passenger lounges.

The companies announces that fares will not increase and flight options will improve, with 419 aircraft flying to 205 destinations, instead of 141 for British Airways and 64 for Iberia. UK customers will have increased access to Vueling’s Latin American network while Spanish and Latin American passengers will be able to utilize the operations to Europe and Asia provided by British Airways.

With capacity up to the limit at London’s Heathrow Airport, BA passengers might find themselves with a stopover at Iberia’s Madrid airport hub on long haul flights.

This merger now adds Iberia to the proposed British Airways alliance with American Airlines on trans-Atlantic routes, which will greatly affect fares and schedules on a number of flights offered by the three companies.